When it comes to planning for your financial future, Tax-Free Savings Accounts (TFSAs) and Registered Retirement Savings Plans (RRSPs) are some of the most common and useful savings tools available to Canadians.
But before you decide where to put your money, it is important to understand the similarities and differences between the two.
What is an RRSP?
RRSPs allow you to contribute money to your savings while also recognizing tax savings. Each year, you have a contribution limit – in 2018 this limit is equal to 18% of your 2017 income up to a maximum of $26,230. Any unused contribution space from previous years is carried forward indefinitely.
When you contribute to your RRSP, the amount is taken off of your taxable income, dollar for dollar, meaning you do not have to pay tax on the contributed income in the applicable year.
Any amount you withdraw in the future, including interest earned (investment income), will be taxed at the applicable rate. With proper planning, it should be taxed at a rate equal to or lesser than the rate you would have paid in the year of contribution, had the contribution not been made.
It is important to note that once an amount is withdrawn, you permanently lose the contribution room, with some exceptions, i.e. the Home Buyer’s Plan.
Unlike other tax saving tools, that must be finalized by December 31, contributions to your RRSP can be made until March 1 of the following year.
Summary:
- Contributions are tax deductible.
- You pay taxes on withdrawals.
- You cannot recontribute withdrawn amounts.
- You can only contribute to an RRSP until the year that you turn 71.
- Intended for retirement.
What About TFSAs?
Unlike RRSPs, there is no time constraints for TFSA contributions. This is because TFSAs operate in reverse of an RRSP.
While the money you deposit into your TFSA is taxed on the current years return, when you withdraw the funds, you do not have to pay taxes - even if the withdrawal includes interest earned (investment income).
Similar to an RRSP, your TFSA has an annual contribution limit which is carried forward indefinitely. The limit for 2018 is $5,500. However, the total TFSA dollar limit in 2019 is $6,000. Unlike an RRSP, you can re-contribute amounts withdrawn, but you must wait until the following year to do so.
Summary:
- Contributions are not tax deductible.
- You do not pay taxes on withdrawals, including interest earned on contributions.
- You can recontribute withdrawn amounts, starting in the year following the withdrawal.
- There is no age limit on making contributions.
- Can be used for any savings goal.
If you are unsure of how much you can contribute to your RRSP and TFSA in any given year, you can contact the Canada Revenue Agency (CRA) at 1-800-959-8281 or log into your My Account.
For more information on RRSPs or TFSAs, and how they can be used in your financial planning, contact us today.
